[Federal Register Volume 64, Number 11 (Tuesday, January 19, 1999)]
[Notices]
[Pages 2930-2932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1044]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40932; File No. SR-NASD-98-92]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to a Change in
Position Limits for Standardized Equity Options
January 11, 1999.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on December 11, 1998, the National Association of
Securities Dealers, Inc. (``NASD''), through its wholly-owned
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons. For the reasons discussed below, the
Commission is granting accelerated approval of the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation proposes to amend Rule 2860(b)(3)(A) of the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association''), to triple the position limits on standardized
(exchange-traded) equity options and make them equivalent to the limits
on conventional (over-the-counter) equity options overlying the same
security. Below is the text of the proposed [rule change. Proposed new
language is in italics; proposed deletions are in brackets.
Rule 2860. Options
(3) Position Limits.
(A) Stock Options--Except in highly unusual circumstances, and with
the prior written approval of the Association pursuant to the Rule 9600
Series for good cause shown in each instance, no member shall effect
for any account in which such member has an interest, or for the
account of any partner, officer, director or employee thereof, or for
the account of any customer, an opening transaction through Nasdaq, the
over-the-counter market or on any exchange in a stock option contract
of any class of stock options if the member has reason to believe that
as a result of such transaction the member or partner, officer,
director or employee thereof, or customer would, acting alone or in
concert with others, directly or indirectly, hold or control or be
obligated in respect of an aggregate equity options position in excess
of:
(i) [4,500] 13,500 option contracts of the put class and the call
class on the same side of the market covering the same underlying
security, combining for purposes of this position limit long positions
in put options with short positions in call options, and short
positions in put options with long positions in call options; or
(ii) [7,500] 22,500 options contracts of the put class and the call
class on the same side of the market covering the same underlying
security, providing that the [7,500] 22,500 contract position limit
shall only be available for option contracts on securities which
underlie Nasdaq or exchange-traded options qualifying under applicable
rules for a position limit of [7,500] 22,500 option contracts; or
(iii) [10,500] 31,500 option contracts of the put class and the
call class on the same side of the market covering the same underlying
security providing that the [10,500] 31,500 contract position limit
shall only be available for option contracts on securities which
underlie Nasdaq or exchange-traded options qualifying under applicable
rules for a position limit of [10,500] 31,500 option contracts; or
(iv) [20,000] 60,000 options contracts of the put and the call
class on the same side of the market covering the same underlying
security, providing that the [20,000] 60,000 contract position limit
shall only be available for option contracts on securities which
underlie Nasdaq or exchange-traded options qualifying under applicable
rules for a position limit of [20,000] 60,000 option contracts; or
(v) [25,000] 75,000 options contracts of the put and the call class
on the same side of the market covering the same underlying security,
providing that the [25,000] 75,000 contract position limit shall only
be available for option contracts on securities which underlie Nasdaq
or exchange-traded options qualifying under applicable rules for a
position limit of [25,000] 75,000 option contracts; or
* * * * *
(ix) Conventional Equity Options.
a. For purposes of this paragraph (b), standardized equity options
contracts of the put class and call class on the same side of the
market overlying the same security shall not be aggregated with
conventional equity options contracts or FLEX Equity Options contracts
overlying the same security on the same side of the market.
Conventional equity options contracts of the put class and call class
on the same side of the market overlying the same security shall be
subject to a position limit equal to the greater of:
1. [three times] the basic limit of [4,500] 13,500 contracts, or
2. [three times] any standardized equity options position limit as
set forth in subparagraphs (b)(3)(A)(ii) through (v) for which the
underlying security qualifies or would be able to qualify.
b. In order for a security not subject to standardized equity
options trading to qualify for an options position limit of more than
[4,500] 13,500 contracts, a member must first demonstrate to the
Association's Market Regulation Department that the underlying security
meets the standards for such higher options position limit and the
initial listing standards for standardized options trading.
II. Self-Regulatory Organization's Statement of Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purposes of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
[[Page 2931]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASD Regulation is proposing to amend the options position limits
prescribed by Rule 2860(b)(3)(A) to triple the position limits on
standardized (exchange-traded) equity options and make them equivalent
to the limits on conventional (over-the-counter) equity options
overlying the same security.
Position limits impose a ceiling on the number of options contracts
of each options class on the same side of the market that can be held
or written by a member, an investor, or a group of investors acting in
concert for purposes of limiting the potential for manipulation that
may be associated with options trading. NASD Rule 2860(b)(3)(A)
provides that the position limits for equity options are determined
according to a five-tiered system in which more actively traded stocks
with larger public floats are subject to higher position limits.
Currently, the five tiers for standardized equity options \3\ are
4,500, 7,500, 10,500 20,000 and 25,000 contracts.\4\ The position
limits for conventional equity options \5\ are three times the limits
for standardized equity options: 13,500, 22,500, 31,500, 60,000 and
75,000 contracts.\6\ The NASD's limits on standardized equity options
are applicable only to those members who are not also members of the
exchange on which the option is traded; the limits on conventional
equity options are applicable to all members.\7\
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\3\ Standardized equity options are exchange-traded options
issued by the Options Clearing Corporation (``OCC'') that have
standard terms with respect to strike prices, expiration dates, and
the amount of the underlying security.
\4\ NASD rules do not specifically govern how a specific equity
option falls within one of the five position limit tiers. Rather,
the NASD's position limit rule provides that the position limit
established by an options exchange for a particular equity option is
the applicable position limits for purposes of the NASD's rule.
\5\ A conventional option is any option contract not issued, or
subject to issuance, by the OCC.
\6\ See Exchange Act Release No. 40087 (June 12, 1998), 63 FR
33746 (June 19, 1998).
\7\ NASD Rule 2860(b)(1)(A).
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The American Stock Exchange, Inc. (``AMEX''), the Chicago Board
Option Exchange, Inc. (``CBOE''), the Pacific Exchange, Inc. (``PCX'')
and the Philadelphia Stock Exchange, Inc. (``PHLX'') (collectively
``Options Exchanges'') have filed proposed rule changes with the
Commission to increase the limits for standardized equity options to
establish parity with the limits currently in effect for conventional
equity options.\8\ In response to these filings, NASD Regulation is
proposing two changes to its rules. First, the proposed rule change
would triple the limits for standardized equity options to be
consistent with the increase sought by the Options Exchanges. Without
such an increase, the NASD's standardized equity options position
limits would be lower than those established by the Options Exchanges
and would lead to inconsistent treatment as to firms (and customers of
such firms) that are NASD members but not members of an options
exchange, the category of persons for whom our standardized position
limits apply.
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\8\ The Commission notes that it recently approved the proposed
rule changes by the Options Exchanges. See Exchange Act Release No.
40875 (December 31, 1998) (approving File Nos. SR-CBOE-98-25, SR-
Amex-98-22, SR-PCX-98-33, and SR-Phlx-98-36) (``Exchanges' Position
Limit Approval Order'').
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Second, the proposed rule change deletes the provisions of Rule
2860(b)(3)(A) that establish that the limits for conventional equity
options are three times the standardized equity options overlying the
same security. This proposed rule change will not affect the position
limits for conventional equity options in numerical terms because of
the commensurate increase in the position limits for standardized
equity options. The proposed rule change, however, is necessary to
eliminate the numerical relationship between standardized and
conventional equity options. The NASD's rules currently provide that
the position limit for conventional equity options shall be three times
the limits for standardized equity options overlying the same security.
This language was added as part of a rule change designed to increase
the limits on conventional equity options to correspond to the
numerical limits that were previously in effect with respect to FLEX
Equity Options.\9\
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\9\ FLEX Equity Options are exchange-traded options issued by
the OCC that give investors the ability, within specified limits, to
designate certain terms of the options (i.e., exercise price,
exercise style, expiration date, and option type). The Commission
has approved a two-year pilot program eliminating position limits
for FLEX Equity Options on the AMEX, CBOE and the PCX. See Exchange
Act Release No. 39032 (September 9, 1997), 62 FR 48638 (September
16, 1997).
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NASD Regulation believes that the proposed rule change is necessary
to ensure that the NASD's standardized equity options position limits
are consistent with the limits of the Options Exchanges. Without an
increase to the NASD's limits, the NASD's standardized equity options
position limits would be lower than those established by the Options
Exchanges and would lead to inconsistent treatment as to firms (and
customers of such firms) that are NASD members but not members of an
Options Exchange, the category of persons for whom its standardized
position limits apply. The postponed rule change also provides NASD
members (and their customers) with greater flexibility regarding their
use of standardized equity options. NASD Regulation believes that the
increased limits are appropriate in light of the surveillance by the
Options Exchanges and the NASD's reporting requirements pursuant to
Rule 2860(b)(3)(A)(5), which it believes provides sufficient protection
against potential manipulation of these position levels.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\10\
which requires, among other things, that the Association's rules be
designed to prevent fraudulent and manipulative acts and practices, and
promote just and equitable principle of trade, and, in general, to
protect investors and the public interest. Specifically, NASD
Regulation believes that the proposed rule change to increase the
position limits for standardized equity options, consistent with the
increase sought by the Options Exchanges, will promote just and
equitable principles of trade, as well as protect investors and the
public interest by providing members and their customers with greater
flexibility regarding their use of standardized equity options and
ensuring that NASD members are not competitively disadvantaged vis-a-
vis members of an Options Exchange.
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\10\15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will impose no burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Commission's Findings and Order Granting Accelerated Approval
of the Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with
[[Page 2932]]
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities association and, in particular,
with the requirements of section 15A(b)(6).\11\ Specifically, the
Commission believes that the proposed rule change is designed to
prevent just and equitable principles of trade, and is not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\12\
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\11\ 15 U.S.C. 78o-3(b)(6).
\12\ In approving this rule change, the Commission notes that it
has considered the proposal's impact on efficiency, competition, and
capital formation, consistent with section 3 of the Act. 15 U.S.C.
78c(f).
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The Commission finds good cause to approve the proposed rule change
prior to the 30th day after the date of publication of notice of filing
thereof in the Federal Register. Specifically, the Commission notes
that the proposed rule change would make the NASD's position limits for
standardized equity options equivalent to the increases of the Options
Exchanges that were recently approved by the Commission.\13\
Accelerating the NASD proposed rule change will ensure consistent
treatment for persons trading in standardized equity options in that an
NASDs member from that is not a member of an Options Exchange and its
customers will have the same position limits for standardized equity
option as an NASD member firm that is also a member of an Options
Exchange. The Commission believes that failing to approve the
conforming rule change for position limits for standardized equity
options would result in confusion, as well as inconsistent treatment as
to firms that are NASD's member but not members of an Options Exchange,
the category of persons for whom the NASD's standardized equity option
position limits apply. Accordingly, the Commission believes it is
consistent with section 15A of the Act to approve the proposed rule
change on an accelerated basis.
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\13\ See Exchanges' Position Limit Approval Order, supra note 8.
The Commission incorporates by reference into this discussion its
findings and rationale set forth in the Exchanges' Position Limit
Approval Order See id.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-NASD-98-92 and
should be submitted by February 9, 1999.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NASD-98-92) is approved.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1044 Filed 1-15-99; 8:45 am]
BILLING CODE 8010-01-M
